Wednesday, June 15, 2016

Our very progressive tax code

The CBO recently released its latest estimates of the distribution of household income, as of 2013. I've extracted some of the data, which I show in the charts below. 

The chart above shows the share of federal income taxes paid by those whose income put them in the top 1%, 5%, 10%, and 25% of total income earned. The top 25% of income earners paid almost 90% of all federal income taxes in 2013. (Equally impressive is the fact that the top 1% of income earners paid about 25% of total federal taxes—income, capital gains, social security, and inheritance—that same year.) The chart also shows the top tax rate bracket for each year. Note that the top tax rate has declined significantly over the years, yet the share of total taxes paid by top income earners has increased significantly. This might be called the Laffer Curve in action: tax something less and you will get more of it.

The chart above shows the share of total income earned by the top 1%, 5%, 10%, and 25% of income earners. Note that these income shares have not increased at all since 2000. Income inequality is not exploding.

The chart above shows the average tax rate paid by income percentiles. The calculation is total federal taxes paid divided by market income (labor plus capital-derived income) and transfers received. The top 1% paid almost 35% of their income in federal taxes in 2013 (the highest rate recorded by this study since 1979), whereas those on the bottom of the income distribution paid only 3%. For those in the bottom quintile, transfer payments represented almost 75% of their total income, whereas transfer payments represented only 0.7% of the total income of the top 1%.

Don't let anyone tell you that the rich don't pay their fair share of taxes.

UPDATE: Mark Perry has an extensive post ("CBO study shows that ‘the rich’ don’t just pay a ‘fair share’ of federal taxes, they pay almost everybody’s share") which adds lots of fascinating detail to the discussion. Including this important tidbit: "... the US has the most progressive federal tax system among all OECD-24 countries." And this:

When the top 20% of US households are financing 96% of the transfer payments to the bottom 60% and financing almost the entire non-financed operating budget of the federal government, I’d say “the rich” are paying beyond their fair share of the total tax burden


Benjamin Cole said...

Since the 25,000 page US tax code is kin to a WWE wrestling championship, I won't say anyone is taxed fairly.

There are many imponderables, such as the concept of adjusted gross income, unreported income in offshore refuges such as Panama or the Cayman Islands, and the burgeoning cash economy inside the US. There is $4,300 in circulation for every resident of the US.

There are further adjustments to be made for state and local taxes.

Is sum, nobody knows jackdoodle about taxes, except that the current system is indecipherable.

Andrew Ross said...

Very misleading to only consider income tax.
It's only part of the total tax burden

When sales and property taxes are included, the picture is very different.
Particularly true of people in lower income tax brackets who pay sales tax.

Rob said...

Scott, sorry to ask again about "Brexit" but with the vote just a week away and the UK stockmarket and Sterling back in the danger zone, do you think that a vote to leave the EU would send world stockmarkets into a bit of a meltdown ? The UK Chancellor yesterday warned that if we leave, taxes will have to go up and many budget cuts will be needed to counteract what he predicts will be another recession. Thanks.

William McKibbin said...
This comment has been removed by the author.
William McKibbin said...

As I've said many times, the US needs to cut spending by a minimum of 40% immediately. Once the budget is balanced, then we can perhaps pay down some national debt. The end picture should be to end personal income taxes. Only corporations should be subject to taxes. My vision for future government is also more digital. Thus, only uniformed personnel should receive government salaries -- no exceptions whatsoever. Life with minimal government would be great!

Scott Grannis said...

Tax clarification: The first of the three charts in this post refers only to federal income taxes. The second refers to all federal taxes (personal and corporate income taxes,employment taxes, and estate and gift taxes). It does not include state income taxes, property taxes, or sales taxes, but those would be a fraction (10-25%) of federal taxes.

The third chart compares total federal taxes to total income (labor income, capital income, and transfer payments).

Scott Grannis said...

Re: Brexit. I am certainly not an expert on the potential ramifications of a Brexit, nor on British politics, so my opinion on this issue is of little value. But as a supply-sider, I think that eliminating layers of government (i.e., all the burdens of the European Union) and regaining some sovereignty (e.g., restricting immigration to some extent) could lead to an improvement in "animal spirits," which in turn would be good for growth in the long run. As for international trade, I find it hard to believe that things would shut down, since the UK is a very important trade partner within the EU.

The best thing the UK could do upon exiting the EU and its treaty obligations would be to do nothing: simply open itself to all international trade. Who needs treaties, when the country that most benefits from trade is the one that restricts it the least? The best solution for a Brexit is the easiest.

NormanB said...

Although 'tax rates' is appealing to some as a measure of progressivity that is not what the Left is interested it. They are interested in how much spending money the various tranches of income are getting. Using Mark Perry's cut of this data it turns out that by quintile the net after tax and including transfer payments works out to $24,600, $43,500, $60,800, $86,000 and $195,000 per year.

Who in the world would believe that 20% of our households can actually live a decent life at $24,600 per year? And likewise for the top 20% that $195,000 isn't a whole lot of money.

As a result, 20% of our population is living like dogs and another 20% are living like kings. Lucky for the Conservative Economists the Left hasn't figured out how to make the data hit home.

Of course, how to address this without killing the Golden Goose is the issue.

Rob said...

Thanks very much Scott, your views are always interesting and thought-provoking.

Johnny Bee Dawg said...

we could "address" the quintile that is "living like dogs" by making the economy more robust, so that there are more opportunities and choices of jobs available to them. More ways to improve their own circumstances. The only way to do that is to encourage growth, instead of discourage it like we have been doing ever since the 2006 Congressional election. Encouraging growth requires shifting power away from government, and returning it to people. We need to stop kicking hell out of that golden goose...our policy makers and enforcers have been meddling in and mis-pricing the normal operation of markets, which always hurts the poorest citizens.

The problem is stated quite well by Scott himself in an earlier comments section. My only disagreement is that Scott thinks the policies were well intentioned. I think that unConstitutional policies are implemented purposely to create dependency of the poor and power for socialist rulers. The results of government overreach are almost always bad outcomes for the poorest among us, yet politicians still do it to them over and over.

Scott explains....
"It's almost always the case that public policy that interferes with the normal functioning of markets has the opposite effect of that intended. Transfer wealth from the rich to the poor, and the poor are the ones who suffer the most (because the rich leave or don't start businesses).
Raise the minimum wage and you find that those most in need of jobs find it harder to get jobs.
Lavish welfare money on the population and you end up with millions dependent on government programs and lacking in self esteem.
Mandate the purchase of health care, arbitrarily cap prices, limit choices and you find that health care becomes more expensive and increasingly scarce.
Make hundreds of billions in grants to "green" energy companies in an effort to improve the environment and you find that scarce resources are wasted, windmills kill thousands of birds, the desert is covered with mirrors that don't work and the ones who benefit most are the crony capitalists (Al Gore comes to mind)."

Frozen in the North said...

Scott on Brexit

I think you miss the point; those against leaving are thinking of their wallet, those "not delusional" that exit will actually be very expensive are thinking body politic. Magna Carta and all that! The real issue in Europe is the death of democracy, the systematic replacement of elected official and democratic institution with bureaucratic and autocratic institution.

If you think of your wallet, then leaving Europe's embrasse is a massive error. If you believe that democracy is still important, then vote to leave (which is why in the end they will vote to stay). To think for one minute that this is all about the "animal spirit" is an Americanisation of the British's view of things and entirely misses the point.

Scott Grannis said...

Frozen: I don't agree that leaving will be bad for wallets. But that's just my semi-educated guess. The voters can think whatever they want, and on that score you are probably right that they believe leaving would be expensive. Furthermore, if upon leaving it turned out not to be bad for wallets, would that not awaken animal spirits?

Benjamin Cole said...

I understand and admire free-trade theory. And I prefer less rather than more government regulations in any circumstance. Perhaps in a perfect world we would not even have nations.

That said, it seems obvious that the entire Far East has boomed not on free trade, but on developing export-model economies that were administered and aided by government.

It is also obvious that when Detroit stopped exporting automobiles it became a much poorer region. (And yes unions welfare and regulations helped kill Detroit, but the fact remains it is poorer for not exporting.)

Is it true that a nation can perpetually borrow and import its way to prosperity?

I find free-trade theory deeply compelling, yet the facts on the ground tell me that free trade arguments are a little bit glib.

Johnny Bee Dawg said...

Growth rates for the EU have been anemic since it was created.
Not sure why staying would be good for wallets. I think growth would surge if countries embraced self determination instead of collectivism & unelected bureaucrats. After all, people lawfully acting in their own self interest has always created the most prosperity for the most people.
The EU seems like a failed experiment of massive government controls to me. Nothing "free trade" about it.
Every economic activity is coercively tied to bureaucratic social engineering.
I think the power bosses are afraid that the people will figure out the emperor has no clothes.

Matthew Grech said...

Benjamin: I'm reading a book authored by Kirk Beattie. In the acknowledgments section he thanks a Dr. Benjamin Cole. You?

Benjamin Cole said...

No. I am not a doctor.

Hans said...

A honorary degree is called for, Dr Cole!! Keep posting your
excellent comments as well as your concerns for zoning,
which will add to the next housing inequality crisis and campaign.

Please, add an additional 1/3 to 1/2 to your tax base
as a result of mandates and well known hidden taxes.

What's in your wallets - either nothing or governmental units.

I would agree with Dr McKibbin's view that significant spending
reductions are required. Of course, since Conservatives are not
in power and perhaps will never be, this much needed outcome will
not happen.

From 1962 to 1993, CONgress was controlled by the Socshevikes with
the exception of some six years. Now the price is being paid, almost
in full.

What is badly needed is the deconstruction of a thirty years war
on morals and values, which is destroying America's economic
foundation and future.

The undocumented drug trade, is enjoying record free cash flows
despite the interventions by the authorities. Yes, there are still
growth industries, meeting and or exceeding the supply and demand